Key Investment Highlights

 
Hastings Group Holdings Plc – Strong Business Model with Good Progress on Strategic Initiatives

Hastings Group Holdings Plc (LON: HSTG) is a Bexhill, United Kingdom-based agile and digitally focused general insurance Company. The Group is identified as the UK’s leading general insurance provider with offices located in London, Gibraltar, Leicester and Bexhill. HSTG is focused on delivering on the growth plans through embracing new technology, digital leadership and investing in 4C’s (community, company, customers and colleagues). The Group underwrites 90% of policies through Advantage Insurance Company Limited based out of Gibraltar. The Company operates through two separate businesses, Hastings Insurance Services Limited for Retail business and Advantage Insurance Company Limited for Underwriting business.


(Source: Company Presentation)

Key Fundamental Statistics

Growth Catalysts and Risk Assessments

The Group’s future growth rate trajectory remains strong with the growing customers push towards the online sources for buying insurance policies using price comparison websites. It has an established track record of building strong customer relationships, and the further upside potential is supported by an incremental growth in the new business. Moreover, the Company is investing continuously in technology to become a digitally enabled insurer. Investment in future business helps in achieving further sales growth and operational efficiencies. It has a strong financial discipline, which helped the Company to have a robust and effective balance sheet. The Group’s board stays confident in the ability to capitalise on the long-term profitable growth opportunities. HSTG has a well-diversified investment portfolio, low-risk profile and liquidity remains strong. Delivery of benefits from the strategic initiatives, usage of modern technology and underlying business performance remains in line as expected by the management. Changing market dynamics, along with a continued programme of investment in digital capabilities augur well for the future growth initiatives.


(Source: Company Website)

However, the Company is exposed to certain risk factors. Any uncertainty in the financial transactions and losses above the charged premiums could lead to the financial and insurance risk. The Company’s inability to fulfil the Three Year Plan may suffer through strategic risk. The Company needs to protect the data and prevent fraud from lowering the risk related to data governance and operations. Legal & Regulation and Conduct also pose as other significant risks for the Company. The Group needs to keep a close watch to protect any breach related to the regulatory requirement.

Industry Outlook Dynamics

In the UK, non-life insurance gross written premium (GWP) is expected to grow at CAGR of 3.8 percent between 2019E-2023E. The value of non-life insurance GWP in the UK is expected to grow from about £77.7 billion in 2019E to close to £90.2 billion in 2023E. In 2018, the value of non-life insurance GWP was approximately £75.6 billion. The insurance sector is experiencing an increased use of digital channels for self-serve functionality, which has resulted in increased online policy adjustments and fewer customer service calls. In the UK, the average market motor premium has increased by about 10 percent in the last three years due to higher cost of accidental damage claims. In 2019, there was close to £1.2 billion of fraud committed in the UK motor insurance market, and the insurance companies are using anti-fraud platforms to detect the scams. The vehicle technology is used to reduce the driving risk, and it is estimated by the Society of Motor Manufacturers & Traders that close to 25,000 serious accidents could be prevented by 2030 through semi-autonomous driving.

Business Model


(Source: Company Website)
 
The Group’s business model is based on a data-driven and disciplined approach to agile pricing and underwriting for maximising value through focused product portfolio brand and multichannel distribution model. The Group’s business model is capital efficient with low cost and made separation between retail and technical pricing. HSTG business model is primarily focused on the private car insurance market in the UK and accounts for around 87% of LCP (live customer policies).

Business Strategy

The Group’s strategy is focused on six factors which are delivering maximum value to shareholders.


(Source: Company Website)
 
Segment Analysis

The Group classified the operations into two segments in FY2019. Overall, the business divisions are focused on providing underwriting services and retail services.  The revenue and profitability highlights of the reportable segments can be seen in the image below:



(Source: Annual Report, Company Website)
 
Synopsis of Recent Development

On 13 May 2020: The Group announced Relationship Agreement Termination with Broad Street Principal Investments International Ltd and few affiliates of the Goldman Sachs Group Inc (Material Shareholder).

Key Performance Indicators
  
 
(Source: Annual Report, Company Website)
 
Although The Solvency II coverage ratio has declined in the financial year 2019, the Group managed to keep it in between set target of 140% to 160%. HSTG’s live customer policies have increased by 5.1% to 2.85 million in the financial year 2019, reflecting strong retention rates and priority given to pricing discipline. The Group’s total stock share (private car) has increased to 7.7% in the financial year 2019.

Top Shareholders Statistics

Trading Update (for 3 months period ended 31 March 2020): Reported Decent Underlying Business Performance


(Source: Company Website)

On 15 April 2020, the Group provided an update on the trading performance with gross written premiums stable at £234.3 million, and live customer policies (LCP) increased by 4% year on year to 2.87 million. Net revenue was marginally down to £179.2 million against the same period of the last year, with policy growth being more than offset by a decrease in the investment income and lower earned premiums. The Company witnessed continued progress on the other strategic initiatives, with increased digital adoption and improved online functionality. Decent progress was reported on the Group’s pricing and anti-fraud work. Underwriting trading subsidiary’s Solvency Capital Ratio is expected to remain within the 140%-160% target range due to the well diversified investment portfolio and a low-risk profile of the Group.

Operational Highlights (for the financial year ending 31 December 2019)


(Source: Company Website)

The calendar year loss ratio, after the impact of the Ogden rate change, was 82.6%. Before the impact of the Ogden rate change, the loss ratio was 81.6%. The Group’s increased calendar year loss ratio was due to the elevated claims inflation experienced in 2019. Led by the improvement in the Group’s strong retention rates, the Group achieved a 5.1% year on year growth in policies, to 2.85 million customers policies as of 31 December 2019. The Group’s private car market share has continued to surge, reaching 7.7% as of 31 December 2019. The Company’s net debt has remained stable with closing net debt for the year at £232.4 million (2018: £230.9 million). On 31 December 2019, the net debt leverage multiple was 2.1x, after the payment of the interim dividend, from 1.2x last year (2018) as a result of a lower adjusted operating profit.

Financial Highlights - Increased Premiums in a Competitive Market Environment (31 December 2019)


(Source: Company Website)

For the financial year ending 31 December 2019, the gross written premiums stood at £961.6 million, a slight increase from the previous year (2018: £958.3 million). The Group’s underlying average premiums increased by 5% with the surge in the prices. Further growth in the home policies to 209,000, a 27% increase year on year, as the Group continued to improve the capabilities of the Company’s in-house underwriting team and work with third party panel members. Adjusted operating profit reduced by 42% to £109.7 million (FY18: £190.6 million), due to the impact of the Ogden rate change, the recognition of a VAT refund in 2018, an increase in the calendar year loss ratio, and increased underwriting levies and investment in strategic initiatives. During the year 2019, the Group generated £141.0 million of free cash (31 December 2018: £167.7 million), comprising of retail free cash generated of £76 million, and the £65 million dividends declared and paid by AICL (Advantage Insurance Company Limited).

Financial Ratios – Strong Reserves in FY2019 versus Industry Median

In the financial year 2019, the Insurance Metrics of Hastings Group Holdings remained strong as compared to the industry median. The Group’s reserves were higher as compared to the industry. On leverage front, the debt-equity ratio of the Hastings Group Holdings Plc’s was 0.40x, which was higher as compared to the industry median of 0.36x, reflecting that the company is more leveraged as compared to the industry. The asset-equity ratio was at 4.95x, which was lower as compared to the industry median of 9.92x.

Share Price Performance Analysis

 
Daily Chart as on 27 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)
 

On July 27, 2020, at the time of writing (before the market close, at 11:14 AM GMT+1), Hastings Group Holdings Plc shares were trading at GBX 168.90, down by 1.34% against the previous day closing price. Stock 52 week High and Low were GBX 207.40 and GBX 136.50, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Hastings Group Holdings Plc Vs FTSE-Mid 250 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Hastings Group Holdings share price has delivered 6.36% return as compared to 1.21% return of FTSE-Mid 250 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology

Price/Book Value Approach (NTM)



To compare Hastings Group Holdings Plcwith peers, Price/Book Value multiple has been used. The peers are Sabre Insurance Group Plc (Price/NTM Book Value was 2.40), Beazley Plc (Price/NTM Book Value was 1.81), Hansard Global Plc (Price/NTM Book Value was 1.74) and Lancashire Holdings Ltd (Price/NTM Book Value was 1.55). The Average of Price/NTM Book Value of the company’s peers was 1.88x (approx.).

Business Outlook Scenario

Gross written premium remained stabled at £234.3 million in the first quarter of the financial year 2020, and the LCP (live customer policies) surged by 4% to 2.87 million on year on year basis. The Group remained focused on pricing discipline in the Q1 and achieved policy growth through strong retention rates. During 2019, the Company continued to make progress on the operational, technology, and strategic front. HSTG’s underlying performance in Q1 FY20 was in line as expected. The Board highlighted that, notwithstanding significant market volatility, the Company’s Solvency position remained robust. The Group remains highly cash generative, and net debt position remained stable in 2019 with funding secured by the long-term fixed-rate Bonds issued in 2018. The Group has minimised any interruption for clients, supported by the digital investments platform, with even more clients now using the online services and mobile app. Furthermore, the Company’s investment in future business would help in achieving further sales growth and operational efficiencies. Also, the market dynamics and recent trends offer ample opportunities on a continuing basis to stay ahead of the curve in terms of competitive positioning. The Group remains focussed on building the UK’s best and biggest digital insurance provider.

Over the course of 4 years (FY15 - FY19), the Company’s revenue surged from £480.20 million in FY15 to £739.6 million in FY19. Compounded annual growth rate (CAGR) stood at 11.40%.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation at the current price of GBX 168.90 (as on 27 July 2020, before the market close at 11:14 AM GMT+1), with lower double-digit upside potential based on 1.88x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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